Lending Implications of U.S. Bank Stress Tests: Costs or Benefits?

62 Pages Posted: 24 May 2017 Last revised: 18 Aug 2017

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Raluca A. Roman

Federal Reserve Bank of Philadelphia

Date Written: August 17, 2017

Abstract

The U.S. bank stress tests aim to improve financial system stability. However, they may also affect bank credit supply. We formulate and test opposing hypotheses about these effects. Our findings are consistent with the Risk Management Hypothesis, under which stress-tested banks reduce credit supply – particularly to relatively risky borrowers – to decrease their credit risk. The findings do not support the Moral Hazard Hypothesis, in which these banks expand credit supply – particularly to relatively risky borrowers that pay high spreads – increasing their risk. Results are generally stronger for safer banks, banks that passed the stress tests, and the earlier stress tests.

Keywords: Bank Stress Tests, SCAP, CCAR, Regulatory Disclosure, Lending, Risk

JEL Classification: G18, G21, G28

Suggested Citation

Acharya, Viral V. and Berger, Allen N. and Roman, Raluca A., Lending Implications of U.S. Bank Stress Tests: Costs or Benefits? (August 17, 2017). Journal of Financial Intermediation, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2972919 or http://dx.doi.org/10.2139/ssrn.2972919

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Raluca A. Roman (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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